The Dogs of the Dow Are Outperforming Their Index

The "Dogs of the Dow" dividend strategy is one of the simplest for beating the market. Over the coming year, I'll track the Dogs' performance and keep you abreast of news affecting these companies.

The strategyThe Dogs is an investing strategy that buys and holds equal dollar amounts of the 10 best-yielding dividend stocks of the Dow Jones Industrial Average . The strategy banks on the idea that blue-chip stocks with high yields are near the bottom of their business cycle and should do much better going forward. Investors in the strategy then would not only get large dividends but also gains in the stocks underlying those dividends.

High-yield dividendsHigh-yield portfolios are often dismissed as inferior to their growth counterparts for various reasons:

Others believe that dividend payments mean that management believes the business is done growing.

Evidence compiled by Tweedy Browne refutes these falsehoods. Research shows that portfolios of high-yield dividend stocks outperform lower-yielding portfolios and the market in general. In fact, a study by noted finance professor Jeremy Siegel found that over 45 years, the highest-yielding 20% of S&P 500 stocks outperformed the S&P 500 by three times! The highest-yielding stocks turned a $1,000 investment in 1957 into $462,750 by 2002, compared with $130,768 if the same money was invested in the index.

PerformanceAfter beating the Dow by 6.8% in 2011, the Dogs of the Dow underperformed the Dow by 0.2% in 2012.

Check out the Dogs' performance in 2013 so far:

Company

Initial Yield

Initial Price

YTD Performance

AT&T

5.34%

$33.71

10.25%

Verizon

4.76%

$43.27

14.92%

Intel

4.36%

$20.62

7.06%

Merck

4.20%

$40.94

9.00%

Pfizer

3.83%

$25.08

16.09%

DuPont

3.82%

$44.98

10.27%

Hewlett-Packard

3.72%

$14.25

68.36%

General Electric

3.62%

$20.99

11.05%

McDonald's

3.49%

$88.21

13.93%

Johnson & Johnson

3.48%

$70.10

17.24%

Dow Jones Industrial Average

13,104

11.25%

Dogs of the Dow

17.82%

Dogs Return vs. Dow (Percentage Points)

+6.57%

Source: S&P Capital IQ as of March 30.

This week, the Dow Jones Industrial Average was up 0.40%. The Dogs rose more than the Dow, moving up 2.12%. That brings the Dogs' outperformance up to 6.57 percentage points better than the Dow itself!

Movers and shakersThe biggest mover this past week among the Dogs of the Dow was again Hewlett-Packard, which rose 3.47%. The second biggest mover was Intel, up 2.39%. On Tuesday, the government reported that PC sales rose 2.5% in February. Investors' concerns over declining sales have weighed on PC manufacturers, so the report was welcome news.

UpcomingThis week, ADP and the government release their reports on job growth. ADP is expected to report private-sector payrolls growth of 210,000, an increase from last month's 198,000. The government is expected to report nonfarm payrolls growth of 193,000, down from last month's 236,000 as the sequester kicks in and slows jobs growth.